Baxter International Inc. (BAX) Earnings Call Transcript & Summary

Good morning, everyone. Happy to host our next session with Baxter. We have CEO, Joe Almeida. And joining us later for Q&A is CFO, Jay Saccaro. I'm Robbie Marcus, med tech analyst at JPMorgan. Just a reminder, feel free to submit questions online or e-mail or chat me online. If you have questions, I'll do my best to answer them. Otherwise, Joe, I'll turn it over to you, and I'll see you in a few minutes for Q&A.

Thank you, Robbie. Good morning, everyone. I would like to start the meeting today wishing everyone a Happy New Year and wishing you all be healthy and safe. Our safe harbor statement is in the second page of the presentation and extensive, and you should read that carefully. Baxter is a 90-year company that is well positioned to operate in the current health care space and for the future as well. We have medically necessary products and therapies across the continuum of health care with significant manufacturing expertise across the globe in a very innovative workplace and we have now embraced significant ESG targets that will put Baxter in the top quartile of all the 3 measures. We're going to discuss this in a little bit. I'd like just to take a moment to get you through our journey in Baxter. In 2016 to 2017, we had a fresh start. If you remember, we have spun off our BioScience business and Baxter went back to own the assets that we had for a long time. We had to realign our structure for innovation. We had very little innovation going on in the company. We created market -- the regional market strategies to be able to go to market and do geographic expansion as well as to bring new people to the company to be able to reenergize our growth. We also had significant work in what we call patient safety and quality. This is our #1 priority that we bring together into every single thing that we do. Our mission to save and sustain lives is in the minds of all the 60,000 employees of Baxter today. And the quality work that we need to do was significant, and we continue to work very hard in every aspect of it, always with patient safety and quality first, top of mind. And also, we had to strengthen our financial position. We had issues with delivering free cash flow growth. We went through this 2016, 2017 with a significant amount of energy, and we were able to reestablish Baxter and put the Baxter back into the innovation and growth vectors, as well as making sure that we were addressing our warning letters and the things that were in the past and have plagued the company in years before '16. When we came into 2018 to 2019, we were building a foundation for the future. We refined our strategy to make sure that we are deploying capital to the right places. We bolstered our organic growth in a way that are 100 to 150 basis points above our market growth and completed several business development opportunities. There were small tuck-ins, but then were necessary to continue to enhance the company's prospects and the value of the company vis-a-vis acquisitions in our advanced surgery and other parts of the business. Then in 2021, we accelerate the transformation of the company and we think, looking at the future, there is an important message about connected care, connected health and how we bring that together into Baxter. How do we look for Baxter to be an integral part of the health care world in 5 to 10 years from today, continue to -- its relevance in every care setting. So advancing patient care and increasing our stakeholder value to expand and reach high-impact innovation, digital enablement. This is what we have worked hard in the last 90 days with the integration -- with the acquisition of Hillrom and [indiscernible] with the closing in December. We've been doing a lot of work for the integration. So one is the integration in 3 major buckets. We are evaluating growth opportunities on the top line. We are participating now in a $40 billion-plus total accessible market with 5% of weighted average market growth rate, which is a very good growth rate for the company in terms of its markets. We're developing the framework by which we can deliver combined opportunities for both companies and we continue to assess the acceleration of these opportunities. We also will continue to expand margins. We expect to deliver about $250 million of annual pretax cost synergies by the end of 2024. And we are, as always, enhancing shareholder value. We anticipate low double-digit accretion to adjusted earnings beginning in 2022 and expanding thereafter. We have high single-digit return on invested capital, ROIC expected by 2026. So this is a strategic combination focused the company on transforming health care and creating value for the future. The sales of Baxter and Hillrom combined are $14.6 billion based on 2020 revenues. And we will have about 47% of our sales in the U.S. and 53% of the sales outside the U.S. We now have 10 categories of products. We continue with the top categories of Baxter Renal Care, it's been the largest one within Baxter Medication Delivery, following that with $2.7 billion in global sales. Pharmaceuticals patient support systems, a Hillrom division, frontline care, another Hillrom division, clinical nutrition, advanced surgery, acute therapies, biopharma solutions, our BPS and Global Surgical Solutions, which is the smallest group within Baxter, they came through the acquisition of Hillrom. But let's frame this for the future. How do we connect care and how we create relevance in where we participate? We have significant installed base of devices. So if you think about what is connected care? It's, first of all, enablement, enablement of the devices. Creating the analytics on the data and to communicate that data back and forth and create the insights. So for instance, when we look at smart devices, we look at 2 million devices that Baxter has in the marketplace today globally. Those devices, the ability to put them to communicate and transmit data back and forth between a nurse station and the device is extremely important. That is knowledge, that is awareness. From there, we go into the ability in creating the insights from the data. So what is the data telling you? But what is you're not seeing that the data is telling you? And that is the analytics of the data that we're going to bring together. For instance, safety tools for delivery of medication to infusion pumps. Using artificial intelligence to make sure that if there is a mistake, the mistake is caught before the infusion starts. And then the communication of that data back and forth with the nurses as well as the clinicians. And this is just one example of it in hospitals. We are a company that is strongly in the home. If you think about Baxter in peritoneal dialysis is in the home, we bring to Baxter, with Hillrom, the clinic and the physician's office. And the alternate side is a new area that Baxter continues to explore and grow. So if you think of the continuum of care from the home to the hospital, the smart devices, the analytics and communications that Baxter brings to the world today, we'll be able to transform the health care and we continue to be a relevant company years to come in the future. So how do we think about opportunities in the near future in terms of commercial opportunities for both companies. We have, as I said, we started with 3 value propositions for the acquisition of Hillrom, 3 important value creations and strategy. One is connected care. I spoke about that, 2 million devices, data transmission, data analytics and insights. Second is geographic expansion of our portfolio, including Hillrom through the Baxter channel present in 100-plus countries. Expansion on the sites of care, because now we have the ability to go to sites of care that we didn't have before in natural channel and vice versa. And enhanced technical services offering, which is both companies together, creating a network of service -- technical service across the globe to create the need -- to address the need rather, address the need of our customers in maintaining the products so they are ready and available when they need them. So if you think about the third bucket of the value proposition is then the optimization and efficiency that we're going to create to bringing Hillrom into Baxter. So we talk about connected devices, geographic and site care expansion, enhanced technical services as well as our synergies in making the companies more efficient. When we think about the innovation that we bring together, we are on the path for launching more than a dozen products as a combined product, as a combined company in 2022. One of them is our NOVUM IQ suite coming out in 2022 in the U.S. as well as already operate in Canada. We have several pumps installed in Canada, premix injectables, ready to use. This is where the efficiency comes in. When you look at how hospitals are today, overwhelmed by the pandemic, having the ability to provide more efficient ways for use of pharmacists and nurses is the way to go. Baxter has been in this journey for a while. For instance, one is the launch of norepinephrine, which has been a success and is doing extremely well. When it goes into the office, we have PanOptic and MacroView Plus is a new digital-ready ophthalmoscope and otoscope to transform the physical examinations. And then when it comes to the ICU is the Prismax 2 single platform with ability to deliver multiple critical care therapies and digital solutions across the continuum. If you think about this product, it was extremely important during the pandemic, continues to be extremely important as we speak today. So as I said, the 3 value creation opportunity: connected care, geographic expansion, site expansion. And then the third one is the ability to make the 2 companies more efficient. So we have 4 different buckets of efficiency. We're looking right now: the operating model of the company, procuring operations in restating facilities. We expect to realize approximately $250 million in cost synergies by year 3 with additional opportunities after that. And when it comes to capital allocation, the question is how would you be using the money that the company is generating? We will, for sure, be reinvesting in our business. What this pandemic has shown to us is that we need more capacity in different places in the world, and we'll continue to invest in that. We'll meet the needs of the patients and providers on a global basis. We're going to continue to pay dividends. We just actually announced $0.20 per share, which reflect the strong position financially, and a commitment to return money to our investors. Share repurchase, expect that to be moderate. We'll be moderate in the near term to focus on deleveraging. Once we go through the deleveraging, we'll go back and we'll resume share repurchase. In M&A, we are -- we have an unwavering commitment to M&A. But I would tell you that we're going to continue to be very focused and very precise in what we're going to invest money to make sure in this period of deleveraging that we can optimize the M&A capability. A part that is very important to Baxter is our corporate responsibility and commitment and -- our corporate responsibility and commitment. So we launched in 2021. The 2030 -- 3 goals for the company. They are dividing protection of our planet, empowerment of our patients and championing our people. So a couple of examples, we will achieve carbon neutrality for direct operations by 2040. We reduce greenhouse gas emissions, implement strategic water and waste plants and integrate sustainable procurement strategies to make sure that not only us contribute to the carbon footprint of Baxter operation, but also we impact our suppliers. When we think about how do we empower our patients, it's all about making sure that the patients who are at home are able to get their products and more people are able to get that technology at home. So bring home dialysis to more underserved patients and improve product process capabilities across our plants. And finally, but as important as the other 2, champion our people and communities, invest $270 million in underserved communities. We have a phenomenal and very touchable goal of achieving top workplace safety performance. We do a phenomenal job in that. We're going to continue to do that. We are top quartile in that measure, and we continue to work hard to deliver a safe work environment for all of our employees and communities where we work and increase diverse representation in leadership roles. Baxter is extremely committed to our 2030 corporate responsibility goals. And when we think about how do we drive the value to all the shareholders, how this all comes together. You think about 3 groups: our patients and providers, our people and our shareholders. Our patients and providers have the commitment of Baxter in producing products that are safe and have the quality we intended to be. We will improve patient outcomes and work to improve the efficiencies in hospitals. That's why connected care is so important. That's why alarming when you may be giving the wrong drug to a patient is important, how to prevent the harm, how to inform, how to create the insights. This is, at the end of the day, providing better health outcomes but also efficiencies and cost savings for the overall system. Our people is everything we have. Retaining, attracting and developing our talent is Baxter's #1 mission when it comes to human capital. We have the ability to shape the future of the health care landscape. But to do that is all about our people and our shareholders who have been with us throughout all these years. We continue to deliver new products and digital innovations in all settings of care, from the home to the acute care, to the hospitals through the office and through the clinics. I would like to reemphasize, underscore the continued momentum in 2022 and beyond. We're going to focus and successfully integrating Hillrom. Our first priority is executing on value capture initiatives and assessing potential revenue growth opportunities, committed to delivering enhanced operating margins, improved capital generation and plan to host, don't forget, first half of 2022, our investor conference. I'd like to thank you all and make sure that you understand in Baxter is 60,000 employees continue to work hard to advance our mission of save and sustain lives. We understand the responsibility. We touched 75-plus million patients a year. Thank you very much. Have a great rest of your day.

Well, great. Thanks, Joe. Appreciate that. And hopefully, we can do your investor conference in person. Hopefully, it's a safe environment for that at the time.

Yes, it is. Yes, it is. We hope so, too. We hope so, too.

You announced the past few years at the JPMorgan conference, any reason you didn't this year? And any thoughts on how fourth quarter ended up?

Sure. Robbie, thanks for the question. It's nice to see you and happy new year. We did actually have a very significant event that took place in mid-December that has definitely impacted the timing of many of our accounting related processes, which was the acquisition of Hillrom. We were thrilled to close early, absolutely. But all of our processes related to how we close the books have had to been modified to reflect this new asset that we have in place. The result of that is the timing of our close, the timing of insights to Hillrom, all of that has been delayed relative to what it would be in a normal year. What I can tell you at this point is our operational sales growth guidance was 3% to 4% for the fourth quarter. We expect to be towards the high end of that range. And so basically, what happened in the fourth quarter is admissions and surgical procedures were broad brush in line with our expectations, maybe even slightly better. Now having said that, it did -- the last couple of weeks in December, there was a real deterioration. But as far as the quarter at large, largely in line with our expectations. So we were able to deliver at the top end of the sales range that we shared with you on the earnings call in October. Now as we look at the rest of the P&L, as we look at the Hillrom, from a P&L standpoint, I can say there was -- there were some incremental costs related to supply chain. We're definitely finalizing the impact of that. And so we'll work through that over the next couple of weeks as we finalize our earnings for the year. So that was definitely a factor. As far as the Hillrom story goes, we're still incorporating those numbers into our financial statements. So we normally like to share a little bit more at this conference in terms of performance. But given this seminal moment for our company, a historic moment, it really has limited our ability to do that.

Great. Well, it's really helpful. Glad to see a good quarter despite all the challenges. While we're on here, any segments you would point out as particularly strong or lagging in the quarter at this point?

Listen, I would say, by and large, the segments kind of came in, in line with our expectations. We did expect a bit of an uptick in Renal Care relative to the full year run rate. You saw that in the quarter. We did expect a challenging quarter for acute, we saw that as well. BioSurgery still faced some headwinds in the quarter. So overall, I would say that there weren't really any surprises. Medication Delivery had a solid performance in the quarter, that was really nice to see. It's obviously such a critical and legacy business for our company with life-saving and sustaining products we're proud to deliver in that area as well. So no real surprises at this point relative to what we expected.

So let's start with Hillrom here. This is top of mind for investors. It's the biggest deal that Baxter has done, at least, since I can remember. And you closed early, as you said. So there's a lot to talk about here. Maybe, Joe, we could start. You had been talking about transformative M&A since you first came in as CEO. I don't want to remember how many years ago it was, but it's grown to be a big number now as it dates myself. But as we think about why Hillrom? Why now? Why was this the right deal after so many years? Maybe just walk us through. You touched on the strategic points in the presentation, but I'm really looking more for why was this the best deal out of all the deals you've seen in the past few years? And why now?

To have a deal that is good for our company, it has to be strategic for us. It has to cross that threshold and then the financial threshold. So when we, in the past, have spoken about other opportunities, and we reviewed many in the company, strategically, it was always there because we're not surface to that point without being strategic. But financially, it was difficult to manage some of these acquisitions due to the price. We think we paid a fair price for the company and we think that the strategic opportunities for the future, when we look at our portfolio of products, which actually does not overlap with them at all, but it's complementary in the future by using some of their technology to help us transmit data, have their technology help us transmit alarms and use our geographic expansion as a way of bringing the products to the world. We're seeing there is more and more -- this makes more and more sense. We are in the early stages of looking at how these products will come together in terms of future products as we did not have a full insight during the period between signing and closing, but now we are diligently working several teams to do this. We also see that our synergies are achievable, and they are creating -- that will create a much more efficient, 2 companies together. So if you think about being in the market where they are in certain areas of the hospital that we are not, certain areas of the clinic and office that we are not and what are the products that will come from this? How do we communicate our CRT? How do we integrate our CRT or pumps and the information coming from the beds. How -- what kind of value that is and how do you communicate effectively? So I think you're starting to see other companies going after this market because it's a market that is very effective in a way of expanding the markets that we have with more short-term products than you would have otherwise.

That's a great answer, Joe. And now that you've had -- it's not a long time, but you've had some time to look under the hood, anything surprising, good or bad, that you've been able to see from the inside?

I like what I saw in terms of pipeline. The company has about a dozen products being launched in 2022. I like that. I like that some of their products are less -- are faster development cycles than ours. Some of the technology that they use for Voalte and other things that they have, they grow faster between innovation cycles, and that is something that we can jump right in to take advantage. Not that we're going to develop a product faster that is a Class II device or a Class III device, but there are things that we were doing in terms of communicating devices that was very complex, and I think they can help us there. So they have great capability in research and development, but more the development piece to get things to the market that we've seen -- that we had seen before. We also think there is a good opportunity in terms of cost synergies going forward.

Joe, as you think about Baxter and Hillrom and put them together, where do you see the biggest potential opportunity for sales synergies? And is this something that we should think about in a 1- to 3-year time frame? Or is this something that will take longer in the 3- to 5-plus type of time frame?

I would say that the synergies is how do we bring their technology and ours to create incremental value in the future. In terms of how you sell today, there are different cycles that they are -- the product goes through. And I'm not sure if we have short-term sales synergies there. There are synergies in how we go to market in terms of sales reps and how we do things in terms of approaching hospitals and IDNs and GPOs, but that is because our product does not have the same categories that they do. I see much more synergies in the future is the combination of technologies. They will make products speak to themselves faster and easier and how do we create a nurse communication channel if a pump is not infusing correctly, that the alarm sometimes is remote in somebody's room, that the nurses get that alarm very quickly, knows exactly where the problem is and have the ability to understand what is in that pump. So how do we create that? And that is something that we're already working on to develop this new product. So I think, Robbie, that is more of we're looking for then going into synergies in terms of how we sell the product. We want to preserve the sales force as is because the sales force is fantastic that we got with Hillrom. We want to make sure they're motivated and they can get the job done that needs to be done. So that is not where the savings are going to come from. The savings are going to come from products that have the ability to be combined in the future and also from efficiencies in the back office.

Got it. And speaking of the back office efficiencies, I imagine those are the synergies you can realize the fastest. How should we think about the yearly cadence of the $250 million? And what's your line of sight to that? Is that a high degree number or is that something you hope to achieve potentially?

Robbie, we don't have -- we hope to achieve...

That's not how we operate, Robbie.

We don't operate like that. We have a pretty strong line of sight. We have Giuseppe Accogli, who is our Chief Operating Officer, who is in charge of that, with a very talented Vice President of transformation for Baxter, Jessica Hameline. Both of them are full-blown introduced. They have a full, full integration management office, IMO. And we have a very strong line of sight on all the numbers. So we are building that. We're building that. We have phases in cadence, but we don't hope for things. We went into this having a pretty good analysis of what the number was.

Sure. And maybe just to add to that, Robbie, we've said about $250 million in synergies. Roughly half of that is coming from functional areas like G&A. The other half is going to come from opportunities in procurement and our manufacturing and real estate consolidation. We have a clear pathway to do it. As far as sequencing goes, I would say, a little bit less than 1/3 in the first year. But generally speaking, it's roughly linear on our way to the achievement of the $250 million. It's maybe a little incremental color for you.

That's helpful. Maybe there's still a lot else to talk about, so maybe I'm going to leave Hillrom for a second and go into some of the business line items. You mentioned 2, Jay, earlier, Medication Delivery and Renal which did well in the quarter. Maybe starting with medication delivery. Any update on the NOVUM IQ pump approval timing? Do you still see that as early this year?

Robbie, as I always say to you folks, we do not forecast -- need to give expectations in terms of how the FDA is going to do their work. But I can tell you that we are -- we find some opportunities for refinement and enhancement of cybersecurity in our large volume parenteral pump. We had different eyes looking at this. We want enhanced. We're going to get that done before submitting the package. So we should expect then in the first half of 2022. But we are -- we'd probably have another few weeks to finish up their work before we submit. But we want to make sure that what we submit to the FDA is a very strong package. As we know, the infusion pumps are very important devices in hospitals. Our mission save and sustain lives are first and foremost in our minds, so we had found opportunities to improve cybersecurity. And we will do this in the next few weeks before we submit.

Great. How do we think about typical approval time lines for pumps after submission? Is that a 6-month, a 12-month type of time frame?

No, this is a follow-up. So there is -- once we submit this package within a certain period of time, there will be 30 days for the FDA to either say okay or no, you have to resubmit the whole thing. So it's 30 days from the moment you submit that -- the information and all the relevant information for the 5, 10-K.

Well, that's much better. Maybe...

It's different. This is different, the process. I'm sorry to interrupt you. The process is different than if you start from scratch, that's a different conversation. This is a process that is ongoing with the FDA. So we have the processes 30 days once we submit.

Maybe shifting over to renal, this was one area where new patient starts were impacted throughout 2020, 2021 as well as they were just across the U.S. and the world. Fewer dialysis patients starting, they're some of the most susceptible to COVID-19 as well. What did you see in fourth quarter? Was that driven by a tick up in new patient starts? Was it PD versus HD? Any comments there would be helpful.

Jay?

Sure. It's -- listen, Robbie, as far as patient recovery goes, it is still early days. We saw a couple of factors that impacted our performance all year. One is mortality of COVID patients, and second was delay of starts. And then we also pointed to staffing shortages as another factor. We're happy with the sales performance in the Q4. But what I would say is that all of those factors will continue, at least to some extent, through at least a portion of 2022. I know I'm being vague here, but with the emergence of Omicron, perhaps we could be coming to the endgame of the pandemic that has big implications for us. But in the meantime, there's some choppiness with respect to performance and new patient starts and even mortality of renal patients, which continues to be a factor. So this will be something that definitely will feature in our 2022 guidance. It's going to be a continued element that we have to navigate. I'm hopeful that by the second half of the year, it's much more normalized. But for the next couple of quarters, it's something that we'll continue to deal with.

Great. Maybe in the last few minutes here, Jay, one of your favorite topics that unfortunately has been hitting all of med tech and really all industries around the world is rising costs both on the supply side and the input side. So how do we think about what you're seeing? You didn't comment on the line items, but maybe from a higher level, what are you seeing? Is that situation getting better, worse? Where are the different rate of changes happening? I think we all want to try and think about into next year, but what are you seeing from a high level on costs?

Listen, at a high level, the fourth quarter was a little bit worse than our expectations, not wildly, but I would say, moderately with some slightly increased pressure. But what I would say is we really tried to factor a lot of this thinking in when we put together our long-term framework for guidance that we shared with all of you. So we really tried to reflect a continued persistent challenging supply chain environment when we share those projections for '22 and beyond, which is why we have been a little more cautious in margin expansion in 2022 versus future years. I don't see any major departures from that at this point, so I think we have the right thinking intact. But Robbie, this is a really volatile area. And as countries contend with COVID and perhaps pursue lockdowns, it does impact the fragile state of the global supply chain that we see. And so there was a little bit of that in Q4. I think we've got it appropriately modeled, but there's a lot of wildcards in terms of how things could play out in the coming months. And so that's -- and we're trying to finalize and reflect on that as we put together guidance for the year. But as I said, generally speaking, things are traveling in line with our expectations.

We have put a very strong cost reduction program in place in operations. Our supply chain has done a great job in containing costs. We have demand in some products that are off the charts versus others that are used less in the case of a pandemic. So they were very flexible in adapting, but there's a cost to it. So as we serve the markets, this temporary costs, which are not we hope will not be persistent, will be throughout 2022 in some shape or form. As we exit the second -- now goes into the second half of 2022, probably will have more alleviating effect. But I think it's very difficult to predict what is going on. I know that the component shortage has been an issue for all the companies. We have done a great job in getting products and getting components, but it is a daily, daily fight. There's -- we've been speaking about this since more than a year ago. And we were one of the first ones who raised the issue and people did not understand what was happening, we were seeing already with the Suez Canal and other things that happened. So we -- as we continue to accelerate our cost reductions across the company, we're able to offset in the past, and we continue on [indiscernible] points are spot on.

Great. Unfortunately, we're out of time, but I appreciate all the great conversation and hope everyone has a great day.

Thank you.

Thank you very much.